June IPCA surprised to the upside at 0.01% m/m and 3.37% y/y. As expected, the low m/m reading reflects the negative turn in food inflation at -0.25% m/m and transportation at -0.31% m/m. Weakness in the latter is due to lower energy prices, especially gasoline. Twelve-month headline inflation fell to 3.37%, reversing the 12-month uptick as forecasted by the Brazilian Central Bank (BCB). However, m/m core measures rose. Prices ex administered prices and food rose to 0.26% m/m from -0.05% m/m in May, and prices ex volatile food and fuel rose to 0.25% m/m from 0.16% m/m in May. Services inflation also accelerated, to 0.63% m/m from 0.36% m/m in the previous month.
We believe this weakness in CPI will intensify the pressure on the BCB to cut rates. However, the BCB will point to the "appropriate" level of core inflation and the uncertainties surrounding the pension reform as a justifiable reason to wait before deciding on the path of monetary policy.